Working Paper: NBER ID: w28468
Authors: Job Boerma; Loukas Karabarbounis
Abstract: We analyze the magnitude and persistence of the racial wealth gap using a long-run model of heterogeneous dynasties with an occupational choice and bequests. Our innovation is to introduce endogenous beliefs about risky returns, reflecting differences in dynasties' investment experiences over time. Feeding the exclusion of Black dynasties from labor and capital markets into the model as the only driving force, we find that the model quantitatively reproduces current and historical racial gaps in wealth, income, entrepreneurship, mobility, and beliefs about risky returns. We explore how the future trajectory of the racial wealth gap might change in response to various policies. Wealth transfers to all Black dynasties that eliminate the average wealth gap today do not lead to long-run wealth convergence. The logic is that centuries-long exclusions lead Black dynasties to hold pessimistic beliefs about risky returns and to forgo investment opportunities after the wealth transfer. Investment subsidies toward Black entrepreneurs are more effective than wealth transfers in permanently eliminating the racial wealth gap.
Keywords: Racial Wealth Gap; Reparations; Heterogeneous Dynasties
JEL Codes: D31; E21; J15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| historical exclusions (J15) | lower wages (J31) |
| lower wages (J31) | racial differences in holdings of both safe and risky assets (G51) |
| racial differences in holdings of both safe and risky assets (G51) | pessimistic beliefs about risky returns (G41) |
| historical exclusions (J15) | current racial wealth gap (I24) |
| wealth transfers to black dynasties (D31) | long-run wealth convergence (F62) |
| investment subsidies for black entrepreneurs (L26) | elimination of racial wealth gap (I24) |